Long-run terms of trade for commodities

What could be the expla­na­tion of the rel­a­tive­ly poor price per­for­mance of man­u­fac­tures exports into which Aus­tralia has rapid­ly diver­si­fied since the late 1980s (when the $A was float­ed)? The RBA shows that in the peri­od 1974 — 2004, Aus­tralian man­u­fac­tured exports achieved a year­ly 3.0 per­cent­growth, com­pared to a world aver­age of 3.6 per­cent. All com­modi­ties (rur­al + min­er­al includ­ing coal) over that peri­od of time achieved a 3.7 per­cent annu­al growth in prices (world com­mod­i­ty prices just 3.2 per­cent). My guess is that the poor aver­age price per­for­mance of our man­u­fac­tured exports is due to com­po­si­tion­al effects. Man­u­fac­tures exports are con­cen­trat­ed in items such as ‘trans­port equip­ment’ where Aus­tralia is now just one cog in a much larg­er glob­al intra-indus­try trade and where the high lev­el of com­peition and sup­ply from devel­op­ing coun­tries ensures slow­er than aver­age price growth. Here is part of the con­clu­sion of the RBA report. bq. Com­modi­ties have long con­sti­tut­ed the major­i­ty of Australia’s exports, aver­ag­ing 73 per cent by val­ue over the past cen­tu­ry. While there has been a diver­si­fi­ca­tion away from com­mod­i­ty exports, they still account for over half of goods exports. Giv­en that the major­i­ty of imports have been man­u­fac­tures, the Pre­bisch-Singer hypoth­e­sis of falling rel­a­tive com­mod­i­ty prices sug­gests that there should be a neg­a­tive trend in Australia’s terms of trade. But the trend is no more than −0.1 per cent per annum over the full sam­ple. The trend appears to have changed at sev­er­al times dur­ing the cen­tu­ry, notably there was seem­ing­ly a stronger neg­a­tive trend in the peri­od 1955–1987, which has since large­ly been reversed. But sta­tis­ti­cal tests are not able to iden­ti­fy changes in the trend. The fact that Australia’s terms of trade declined by less than the decline in the ratio of world com­mod­i­ty prices to world man­u­fac­tures prices is due to two fac­tors. First, the com­modi­ties that Aus­tralia has tra­di­tion­al­ly export­ed expe­ri­enced faster price growth than a broad­er bas­ket of com­modi­ties. Sec­ond, the export base diver­si­fied toward com­modi­ties that expe­ri­enced rel­a­tive­ly faster price growth. Per­haps sur­pris­ing­ly, the growth in man­u­fac­tures exports had lit­tle role in ame­lio­rat­ing the neg­a­tive trend. Man­u­fac­tures export prices have risen more slow­ly than those of com­modi­ties, at least over the past 30 years. Over­all, the neg­a­tive trend is so slight that it is eco­nom­i­cal­ly insignif­i­cant. Of more sig­nif­i­cance is the fact that shocks to the terms of trade have become short­er-lived. I can’t resist includ­ing this graph­ic from the report. Note the plunge in wool after the Kore­an War boom. The drop was com­pound­ed by the much more rapid growth in the vol­ume of oth­er com­modi­ties which grew 15-fold after the mid 1950s, while wool only dou­bled it’s vol­ume.

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